Discount Department Stores -
a Case Study
to accompany
Auditing and Assurance Services in Australia
by Gay and Simnett
Prepared by James Hazelton
This Case is based on Chapter 3 of Auditing and Assurance Services in Australia (3rd Edition)
Learning Objectives
After completing this case, you should be able to:
- Identify why companies may wish to engage auditors to perform non-audit services;
- Understand the responsibilities and reporting obligations for such companies; and
- Understand the restrictions on auditors who wish to perform such services
David Weller was an audit partner with Smith, Slater and Jones, a successful middle tier audit firm. He had been offered partnership a year ago on the strength of his retail audit expertise in general and his relationship with the finance team from Discount Department Stores (DDS) in particular. DDS is a listed company with stores in every major Australian city and Smith, Slater and Jones’ largest client. David had been involved with the DDS audit for the past seven years. He had started auditing the simpler balances such as cash, fixed assets, debtors and creditors before moving onto the more complex and higher risk areas of inventories and provisions. When he was promoted to audit manager he supervised the entire audit, and now as the audit partner he was responsible for signing the statutory accounts.
Like all prospective partners, David had been required to submit a business plan which detailed the fees he had expected to earn for the firm. Being young and ambitious, he had committed to some quite aggressive new business targets, but due to difficult conditions in the retail sector he had found new opportunities harder to find than he imagined.
‘David – it’s Michelle from Discount Department Stores on the phone.’
‘Thanks Susan. Put her through.’
David wondered why Michelle was calling him. Michelle Worthington was the newly appointed CEO of DDS. David’s usual contact was Mark Lewis, the Financial Controller.
‘Morning Michelle - David Weller here. How are you?’
‘To be frank David, I’m losing patience with our accounting system and I was hoping you would be able to help me.’
‘Of course Michelle – what’s the problem?’
‘Well, as you know I have only been with the company for three months, and my mandate from the board is to grow the business much more quickly than it has grown in the past. For me to do that I must have accurate information and that’s just not happening!’ Michelle was clearly upset.
‘What do you mean?’ asked David.
‘So far I’ve received three sets of monthly management accounts, and every month there’s been some sort of error. In March the sales numbers were too low because they didn’t include Western Australia, which runs on a different system to the other states. In April our expenses were too low because our employee entitlement provisions hadn’t been processed in time. In May expenses were too high because we booked the wrong provision for Victorian obsolete stock – it turned out the input clerk added an extra zero by mistake. This just can’t go on – I can’t manage a business if I can’t rely on the monthly accounts. I want this sorted out.’
‘Absolutely’ said David. ‘Let me put together a proposal and meet you next week.’
David was very excited as he hung up the phone. At last he had an opportunity to earn some significant additional fees for Smith, Slater and Jones. He decided his proposal should include four distinct phases:
1 – Mapping of the monthly accounting process. The first step would be to create a detailed flowchart of the monthly accounting system. Some of this work would have already been done as part of the statutory audit, so David didn’t think that this phase would take long.
2 – Identify system weaknesses and propose solutions. Once David and his team understood how the system worked they could determine the root cause of the problems and draw on their retail experience to recommend solutions. David already had some ideas. Clearly, running separate systems in different states increased the possibilities for errors as data had to be transferred from one system to another. Given the problems with the employee entitlements and stock provisions, he also suspected a clear timetable for end of month adjustments was missing and review procedures insufficient.
3 – Work with existing staff to prepare a set of monthly accounts. David felt the only way to really ensure that DDS prepared reliable accounts was for some of his staff to work alongside DDS for a couple of months. David’s people would not be there full-time, but they would work for a few days around month-end to make sure the monthly adjustments were processed accurately and in a timely manner.
4 – A broader review of the DDS IT systems. David suspected the problems with DDS’s accounting system were just the tip of the iceberg as the company had not upgraded its IT infrastructure for many years. If DDS was going to meet its aggressive growth targets, it would need to have robust operational systems – in particular inventory control and sales tracking. David and his team would investigate these systems to determine if they had the capacity to accommodate substantial growth and whether their functionality was comparable to the alternate systems available on the market.
It had taken a lot of work getting the proposal together, but David was sure that he had a winner. He couldn’t wait to meet with Michelle and get started on his new project!
Questions
- Why would a company hire their auditor to perform non-audit services? Why would Michelle have called David in this case?
- What limitations are there on auditors performing non-audit services? Do any of David’s proposals breach these requirements?
- What responsibilities do DDS have if they employ Smith, Slater and Jones to perform any of these services?
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